How do I calculate the IC-DISC commission?

Exploring one of our most frequently asked questions.

 

To take advantage of the tax benefits associated with an IC-DISC, several requirements must be met, and one of the first questions is whether or not the exporter has foreign taxable income. Most of the time, if the exporter is operating at a tax loss, the IC-DISC cannot be utilized. This is because the commission payment to the IC-DISC and the tax deduction cannot cause the exporter a taxable loss on the qualified export receipts. Qualified export receipts include:

  • Sales, exchanges, or other dispositions of export property;
  • Leases or rentals of export property used by lessees outside the U.S.;
  • Services related to qualified sales, exchanges, leases, rentals, or other dispositions of export property;
  • Engineering or architectural services for construction projects located outside the U.S.;
  • Interest on obligations that qualify as export assets.

 

Assuming the exporter does have foreign taxable income for the year, two primary methods can be used to calculate the commission payable to the IC-DISC under Sec. 994(a). These methods are:

 

  • 4% of the Qualified Export Receipts:
    • This method involves calculating the commission as 4% of the qualified export receipts generated by the exporter during the tax year. It’s a simpler approach, especially when dealing with a high volume of low-margin sales. Under the 4% commission calculation method, the commission cannot exceed the foreign taxable income. For example, if the exporter’s operating profit percentage is 2% on the foreign sales, the commission is limited to 2% of the qualified export receipts rather than 4%.

 

  • 50% of the Combined Taxable Income:
    • The 50% combined taxable income method is more intricate. It involves calculating the combined taxable income associated with qualified export receipts by applying the principles of §861, which helps distinguish between U.S. and foreign-source income and expenses. The commission is then calculated as 50% of the foreign-source taxable income. This method is usually preferred when the exporter earns high margins on foreign sales.
    • The calculation process of taxable income per class (domestic vs. foreign) involves:
      • Direct Costs: Allocating costs directly related to either U.S. or foreign income to that specific class of income.
      • SG&A Costs: Allocating selling, general, and administrative costs either directly to the relevant income class or, if they support deductions related to either class, to that class.
      • Indirect Costs: Apportioning costs that cannot be directly allocated based on the ratio of receipts from each class to the total gross receipts.
      • After determining the domestic and foreign taxable incomes, the exporter can pay up to 50% of the foreign-source income to the IC-DISC as a tax-deductible commission. 

 

The purpose of maximizing the commission paid to the IC-DISC is to shift more taxable income from ordinary income to qualified dividend income. However, there’s a cap on the amount of commission the exporter can pay in any given year. The exporter has the flexibility to choose the commission calculation method that provides the greatest tax benefit each year.

 

In conclusion, calculating the IC-DISC commission is not a simple formula; it depends on many factors. To be in compliance and maximize your benefit, it is in your best interest to work with a knowledgeable partner on all IC-DISC activities. For more information or to discuss how we can work together, please reach out: https://tglobaltax.com/contact/